The effectiveness of purchasing activities can be enhanced by proper organization and coordination of the activities. There are four types of purchasing system:-
- Purchase made as per requirement: No purchase is made in advance. Purchase is done as need arises. Method usually applied for emergency requirement or infrequent goods.
- Contract Purchasing: Contract of material is given to an agency. It has an advantage that low price of those materials whose cost fluctuates highly.
- Market Purchase: Purchase is made from the market to take advantage of price fluctuations.
- Schedule Purchasing: It is a cyclic purchase model. A schedule of purchase is made and it is used for those commodities whose price do not fluctuate.
Centralized purchasing means buying and managing purchases from one location for all locations within an organization. This can also be run by a central location buying in to a distribution warehouse that feeds smaller warehouses. This is called a hub and spoke system. The responsibility and authority to purchase, lease, or rent materials, supplies, goods, equipment, or services are placed with the Division of Finance and Operations, Purchasing and Stores Department.
Purchasing is centralized to:
- realize economy, efficiency, and effectiveness in the procurement function;
- pursue quality assurance and standardization;
- maintain the highest standards of ethics;
The control by a central department of all the purchasing undertaken within an organization. In a large organization centralized purchasing is often located in the headquarters. Centralization has the advantages of reducing duplication of effort, pooling volume purchases for discounts, enabling more effective inventory control, consolidating transport loads to achieve lower costs, increasing skills development in purchasing personnel, and enhancing relationships with suppliers.
Advantages of Centralized Purchasing
- Volume purchasing – When the district is able to purchase a single item in mass, vendors are often willing to provide a discount. Purchasing in mass to take advantage of discounts is called volume purchasing.
- Warehouse – In order to take advantage of volume pricing, the district purchases items in bulk. Vendors typically require that the district take delivery of the items in mass. These bulk purchases are stored in the warehouse until the items are requested by the sites.
- Save time in researching products – Individuals spend hours to research the products and to find best price. The purchasing department has resources to help reduce the time to research products.
Disadvantages of Centralized Purchasing
- Good processes are not without their shortcomings. Listed below are some of the challenges of buying in a school district and suggestions on how to help the Purchasing department minimize their effects.
- Extended procurement time – One problem that is commonly associated with centralized purchasing is the perception “it takes too long”. In reality, the purchasing department processes vendor requisitions typically within one (1) day. Typically the delay in the request is either: time spent to research the product, funding sources (account code check and budget approval), vendor stock status, and shipping.
Decentralized purchasing is the opposite where each plant or office buys what it needs. This operation allows any employee to buy what he needs. You can also run this operation with a designated buyer assigned to the site to do the buying. The more decentralized an operation is, the less control the home office has. You have a duplication of effort in buying and less buyer specialization. You lose discounts on quantity buys. You lose freight options based on dollars or weight. Also some support is lost from the supplier as there is no single contact for the supplier to deal with. Volume buying may not be calculated for all your sites.
Advantages of decentralized purchaseing
Advocates of decentralization claim that local management has the incentive to control cost when the local operation is set up as a profit center. Many companies operate with a mixed system. The central operation may buy major commodities but allow local operations to buy all MRO supplies.
It is difficult to change from decentralized purchasing to centralized purchasing. Employees feel their privileges are being taken away. They feel they are losing control of their site. Some will refuse to really cooperate in the changes in hopes to making the program look unsuccessful.